Education financing

In case you haven’t noticed, the cost of education is quite high and growing. Basic tuition is about $7,000 per year and then there are items like books, student fees, transportation, lab fees, computers and not to mention residence and food for out of home students. There are a number of ways to pay for education.

1. The student can pay at the time of education, or even save ahead of time. We are big fans of having students make a financial investment in their education so they know they have not only done the intellectual work but have helped to pay for the financial costs. this can help them appreciate the costs born by parents.

2. Parents can pay at the time of education using cash flow, assets or borrowing.

3. Students can borrow at the time of education. While this can be abused financing part of the cost of education can be a very rational choice if it is viewed as an investment.

4. Parents can save and invest in preparation for their children’s education.

5. Students can seek scholarships and bursaries. It can be surprising to find the number of opportunities for this – search what is available at each institution or through governments.

We tend to place a very heavy emphasis on option 4, sometimes ignoring other priorities It’s not that we should not save up for our children’s education, but that it should not necessarily be our top planning priority and we should consider how much of the expected education costs we want to pre-fund. There are two primary ways we help clients built an education fund.

1.“In trust” accounts: Set up a non-registered investment account in a parent’s name, in trust for a minor. If this account earns interest or dividends the parent pays the income tax. If it earns capital gains the child is taxable, but unless there is a very large income the child will of course pay no tax. This strategy enables you to build a tax free asset which, if handled properly, can be paid out tax free at the parent’s discretion for use by or for the benefit of the child for any purpose, no restrictions.

2. Registered Education Savings Plans. This type of plan is registered, much like an RRSP, but there is no tax deduction. Instead, there is a 20% federal grant (more in Quebec) added to the account to a maximum of $500 per beneficiary child per year. When the money is withdrawn the contributions are returned to the contributor and the gains and grants are taxable income for the child. The money can only be withdrawn without penalties while the child is attending post-secondary education and there are other limitations on the plan.  For parents who are confident their children will go on to post-secondary education a RESP can be a powerful tool.

In all cases, a thorough initial planning discussion with your financial advisor, placing education in your hierarchy of priorities and periodically reviewing all this is an important part of comprehensive planning.